Cooperative Standard-Setting: The Road to Compatibility or Deadlock? The NAFTA’s Transformation of the Telecommunications Industry

Karen E. Lee

8/29/2008
(Original Publish Date: 6/1/1996)

Standardization offers many benefits to the manufacturers, service providers, and users in the telecommunications sector. Compatibility decreases costs, reduces the need for translators, and increases consumer welfare. A user gains greater utility from the consumption of a particular good when all other persons consume a good compatible with the user's product. For example, the number of users of a particular personal computer affects the quantity and diversity of software available for the computer. Furthermore, compatibility permits consumers to use all aspects of a system or network and gives users more freedom to choose the brand name product that best suits their particular needs. Compatibility also reduces the possibility of "premature" technologi cal obsolescence. Users are more likely to purchase a communications technology if manufacturers cannot produce an incompatible commodity. Compatibility increases the product's value to consumers. An incompatible commodity lessens the value of the product the consumer purchased. Moreover, future users gain from a current user's experience with a particular technology. Manufacturers use consumer feedback to improve upon a technology. Thus, future consumers buy a better product. Manufacturers and service providers also benefit from compatibility standards. Standards create a larger and more competitive market. They may promote price competition among manufacturers. Furthermore, compatibility standards prevent manufacturers from wasting resources by producing duplicative equipment that is not interoperable. Service providers, such as telephone and data network providers, profit as well. Providers must invest significant amounts of money in hardware and technology. Service providers are reluctant to invest without a "guaranteed" user market. Compatibility creates the needed user market. Thus, as a result of the proliferation of standards, providers are more willing to invest in the necessary equipment.